O.A. Cleveland: Record cotton carryover hampering upturn in prices

“World cotton growers produced 24 million bales more than we consumed in 2011," says O.A. Cleveland, Jr., Mississippi State University Extension agricultural economics professor emeritus. “The bottom line to that is world carryover increased from about 49 million bales to almost 75 million bales — a record increase and a record world carryover. I could never have imagined I would see that kind of carryover; it’s difficult to even grasp it.” Given the excessive cotton supply, price tanked, Clevleand says.

“A year ago, I promised you a cotton market that was nothing but roses, with prices above $1, and all of a sudden you were hit with a market that nosedived to 65 cents and was struggling for its life,” O.A. Cleveland, Jr., told growers this week. “Now, it’s 30 percent below this time in 2011.”

Despite last year’s drought in Texas that had pushed prices to the $1.45 range, he says, “We found out that, in the world cotton scheme, Texas doesn’t matter any more. They had a major crop bust — and the market ignored it.”

“We also found,” he said at the joint annual meeting of the Mississippi Boll Weevil Management Corporation and the Mississippi Farm Bureau Federation’s summer cotton policy committee, “that U.S. production doesn’t matter that much if there are good crops in both India and China.”

Cleveland, who is Extension economics professor emeritus at Mississippi State University, says good weather and $1-plus prices spurred a very large foreign crop last year, and India, which had imposed a total ban on exports of its cotton two years ago, resumed limited exports.

“The world ended up producing 24 million bales more than we consumed,” he says. “The bottom line to that is world carryover increased from about 49 million bales to almost 75 million bales — a record increase and a record world carryover. I could never have imagined I would see that kind of carryover; it’s difficult to even grasp it.”

Given the excessive cotton supply, price tanked, Cleveland says.

Couple the monster carryover with slower economic growth around the world, and fewer people working, purchasing power slipped into the doldrums.

“The big engine, consumer purchasing power that had pulled the economic train, lost steam and demand dropped. Demand will continue to struggle without that purchasing power; consumption will continue to be slow for cotton and other goods.”

And while the short term outlook isn’t that rosy, he says the picture looks brighter moving into 2013.

“The USDA’s estimate is for U.S. production this year is 17 million bales. But it’s early in the season, and we won’t get an objective survey for several more weeks.

“The situation in Texas is a lot better than a year ago, but subsoil moisture is totally lacking, so they will be dependent on whatever rain falls and a little supplemental irrigation. Regardless, it will still be a short crop.”

“India has had severe problems with their monsoon which, two weeks ago, was 50 percent behind schedule. Things could still rebound to an extent, but they can’t totally make up for all that has been lost with their cotton crop.

“The USDA is forecasting a 1 million bale reduction for India, and, even with a normal monsoon from here on out, they could see another 1 million bale reduction.

“China’s area of commercialized cotton production has been having floods and cold weather, and areas of drought, but they’re not as severely impacted by adverse weather as India.”

Cleveland says he looks for a world crop this year that’s 4 million to 4.5 million bales smaller than 2011. “Consumption is rebuilding very slowly — it could gain 4 million to 5 million bales. This would give us a drawdown in stocks of about 10 million bales, which would take the record high stocks level down to about 65 million.

“That still would be the third largest ever carryover, and doesn’t point to strong prices. I would suggest we could see a low in the 64 cents to 65 cents range. Some analysts are saying 58 cents to 60 cents, but I feel this market has bottomed and I can’t think of a decent reason it would drop back that far.”

Consumption recovery will be slow

Consumption is going to improve steadily, but slowly, Cleveland says.

“While I think U.S. consumption is going to slip some more, in the long term I think the trend is up. Since this meeting was held two years ago, 150 million more people have been added to the world’s population — a lot of mouths to feed, a lot of bodies to clothe. Population growth is more and more a demand factor that’s underpinning prices for many commodities, including cotton.”

Cotton production, Cleveland says, will also be influenced by strong prices for other crops, specifically the cotton/corn price ratio and cotton/soybean price ratio.

“These ratios are strongly favoring grains and oilseeds, and that’s going to continue. Those crops are now the dog and cotton is the tail — those crops, not cotton demand, are going to dictate how much cotton is planted in the short run.

“I would suggest that in 2013, given cotton and grain/oilseed price ratios, we could reduce cotton production not only in the U.S., but worldwide, by as much as 20 percent, and it could drop as much as 25 percent for planted acres.

“By the end of the 2013 season, we will have disappeared the entire excess carryover of cotton that we have in the U.S. We’ll be back down to 45 million to 50 million bales, and that very easily supports a price of $1.25 to $1.35. With great weather and higher production, it could drop to $1.15 to $1.20; but, throw in some problems with the crop, and it could get up to $1.45 to $1.50.

“Looking to toward the end of 2013, I think we can make a case for $1.25.”

Planting of the 2013 crop will begin in Brazil and Australia within the next three months or so, Cleveland says, and acreage could be down 20 percent to 25 percent. “They say, ‘Why grow cotton, when we’re looking at $16 soybeans and $8 corn?’ Consequently, when southern hemisphere planting cranks up and acreage reductions become reality, we should get a bump in cotton prices.

“I’m of the opinion that cotton is undervalued by 15 cents to 25 cents per pound. I know that’s a strong statement, given what some other analysts are saying. But, I think the competition for land by soybeans and corn, is an important key, and that next season we’ll see more cotton ground shifting to those crops.”

Growth in income, employment

Consumption, Cleveland says, “won’t get any worse. We’re seeing growth in income and employment, and economic activity should improve somewhat. I think, coupled with reductions in cotton acreage in the southern hemisphere, that will warrant a boost of 15 cents to 25 cents in the cotton price, which would put it in the 95-cent range. I’m not saying it will go to 95 cents; that’s the absolute high I could see. I think it will probably spend a lot of time in the 80s range.

“Today’s cotton market is not your daddy’s cotton market — it’s an entirely different animal,” Cleveland says. “Today’s market is so heavy with speculative funds and traders from all over the world, so much money coming in, that outside economics and outside factors are having an impact on cotton, grains, currencies, oil, livestock, and other commodity markets.

“Trillions of dollars of speculative money is pouring into all these markets, and basically we have a situation of all that speculative money versus cotton traders.”

The impact of monetary crises in Spain, Italy, Greece, and other countries are also an influence, Cleveland says.

“We went for probably four months when, every Friday like clockwork, the market went down simply because there was a meeting in Europe to try to determine what they could do about the financial crisis in Greece.”

Asked about the USDA’s recent estimate for Mississippi acreage, which was higher than expected, he says, “It was a surprise to me because it was the same as their March estimate, and apparently didn’t factor in the impact of the hot, dry weather we were having. My bias would be for Mississippi acreage in the 515,000 to 520,000 range.

“I’ve second-guessed USDA all my working career, and my guess is that they probably didn’t have enough data at the time to revise their estimate downard to reflect the weather-related problems. Until they come out with their August report, I think we just have to go with our gut feeling.

“But while the number is very important to us in Mississippi, it is not very important in the overall scheme of the U.S. or world situation.”